Morning Commentary: Investors try to make sense of Brexit decision; Turkey bonds tighten

By Christine Van Dusen

Atlanta, June 27 – Trading was mostly mediocre for emerging markets assets on Monday morning, as investors continued to grapple with the United Kingdom’s decision to leave the European Union.

“Many of us are still trying to understand the consequences of Thursday’s referendum in the U.K. on its E.U. membership,” a London-based strategist said. “In the aftermath, we had several key events, notably [prime minister David] Cameron’s decision to resign in October, a petition to overturn the referendum, [Scotland first minister Nicola] Sturgeon’s announcement to seek a potential second referendum on Scotland’s independence, and Spanish general elections.”

The markets are watching to see who will succeed Cameron, as well as the timeline for the U.K.'s departure, “but other uncertainties await us in continental Europe, where anti-status quo forces might try to take advantage from a weakening European Union,” he said.

In response investors on Monday were “still scratching their heads on what to do,” a London-based trader said.

We have “seen net buying of EM on Friday and so far today,” the trader said. “All in all, a tough market to trade, as most people are sidelined. Summer liquidity is on the horizon, so don't expect much to change soon.”

Bonds from the Middle East and North Africa were “OK,” he said. “Spreads are obviously moving with the U.S. Treasury, but not much paper has come out and there is continued demand for paper, albeit bid-side rather than anyone aggressing the market.”

Given that most of the supply expected from the Middle East has already come to the market, “we can start the long grind back in on spreads,” he said.

Turkey in focus

Bonds from Turkey widened 3 basis points to 5 bps on Monday morning while five-year credit default swaps spreads were 5 bps tighter, he said, following some curve-steepening on Friday.

“The long end has come back on some real-money and local buying,” the trader said. “Corporates look to be in favor as well.”

This came as Turkey reached a “breakthrough deal” with Israel, signing a reconciliation agreement to restore their diplomatic ties, the strategist said.

“The new deal allows Turkey to send humanitarian aid to Gaza and develop infrastructure projects,” he said. “In a time where Turkey’s relationship with Russia has been strained – downing of a Russian military jet, support for different sides in the Syria conflict – and while the E.U. is becoming more worried about the suppression of press freedom and the PKK conflict, improving relationships with Israel is seen as a strong positive. Turkey will also be able to reduce its dependency on gas from Russia and instead import from Israel.”

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